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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: Shri Sandeep Gosain & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the revenue is directed against order of the CIT(A)-9, Mumbai dated 15-02-2017 and it pertains to AY 2013-14. The revenue has raised the following grounds of appeal:-
"On the facts and in the circumstances of the case and in law, the Ld.CIT{A) erred in directing the assesseeing officer to restrict the disallowance of expenses to Rs. 11,97,281/-and deleting the balance disallowances of Rs. 1,07,75,5317- without appreciating the facts that there is fall in the gross profit of the assessee company in spite of increase in turnover and also the assessee has failed to submit any evidences of these expenses.”
2 ITA 3736/Mum/2017
The brief facts of the case are that the assessee company is engaged in the business of wholesale and retail trading of all sorts of cloth and other consumer goods, filed its return of income for AY 2013-14 on 23-09-2013 declaring total income of Rs.1,62,35,960. The case has been selected for scrutiny and the assessment has been completed u/s 143(3) of the Act on 22- 03-2016 determining the total income at Rs.2,97,93,880, where the AO has made additions towards disallowance of Rs.1,19,72,812 in respect of expenditure incurred under the head, ‘Deepavali expenses’, donation, general charges, marketing management specialisation expenses, travelling expenses, business promotion and other expenses on the ground that there is substantial increase in expenditure, when compared to previous financial year for which no explanation has been offered by the assessee justifying the sudden surge in expenses. The relevant observation of the AO are as under:-
“3, DISALLOWANCE OF UNREASONABLE INCREASE IN EXPENSES During the assessment proceedings it has also noticed that there was substantial increase in expenses, despite the fact that there was - (1) Nominal increase in the turnover of about 14%. However, the net profit is reported at 0.38% which in the preceding year was at 0.42%. It is also noticed that some items of expenses, has shown very steep increase, such type of vertical increase in the expenses prima facie appeared to be, unreasonable, and not understandable. Therefore the assessee vide notice/ order sheet dated 28/01/2016, was specifically asked to explain the nature of the expenses claimed in the P & L a/c, he was also asked to explain & justify the unreasonable increase in the expenses, he was required to produce evidence to prove his claims & establish genuineness of such expenses: - 3.1 In reply to the above AR vide his letter dated 28/01/2016 has submitted a very short explanation and no satisfactory explanation and evidence to prove his claim was filed. Also no evidence to prove the genuineness of such expenses was filed. 3.2 The reply of the assessee had been considered, however the same is not found to be satisfactory & thus cannot be accepted.
3 ITA 3736/Mum/2017
I In its reply the following expenses the assessee have only stated as mentioned be low:- Deepawali expenses - gifts i.e. sweets, cloth etc. given to employees & other related to business of the company, Donation - given to charitable institutions, General charges - miscellaneous expenses i.e. washing of chandani, floor cover, cleaning materials etc,, Market management specialization expenses - education fees, paid by the company for management course of employee so that their skill can be utilized to increase the sales of the company, Travelling expenses - incurred by the employees for visiting various brandies of the company and suppliers places, Business promotion expenses (Gift) - sales promotion gifts given by the f.r^t.. company to its customers under various Sales promotions schemes, Business promotion (other) expenses - calander, diaries and bags given to customers of the company, Muhurt expenses - company organise "muhurt Sales" for seven days every year in which suppliers, their representatives participate and goods are sold to customers allowing them sales based trade discounts. All the expenses i.e. food, lodging & boarding of suppliers and their representatives are beared by the company and the same are debited under "Muhurt Expenses" Shivratri sangeet mahotsav expenses - done under this head to propagate the company's business with medium of music etc. the products of the company are introduced to interstate customers of Bihar/Jharkand and M P too through music conferences/programmes of Artists etc. at one platform resulting sales promotion. The assessee has not furnished any evidence of having its claimed theses expenses and have also failed to prove that the expenses were increased the purpose of the business. Where there is any fall in the G. P. on the mere increase the business, then in such circumstances also, there is expected on increase in the total profit. Thus the achieving of the total profit is the approach of all the business men's. A mere general statement of the assessee cannot be treated as sufficient to explain & evidence the such unreasonable increase in the expenses. If it was so, there was no need to maintain record & evidence to explain & prove the claim of expenses, incomes etc. Here, the only course could have been adopted by the assessee was to furnish a factual explanation of increase in the expenses & produce the evidence in support of such expenses. However, despite having been allowed sufficient time and opportunity the assessee could not satisfactory explain & prove the genuineness of these expenses claimed in the P & L account. He could not even satisfactorily show that all the expenses claimed in the P & L a/c were incurred exclusively for the purpose of the business of the assessee. From the perusal of the Profit and loss account it is noticed that there was noticed, very high increase in the following expenses:- S.No. Name of Specific item Amount of Amount of Total % of Remarks major head of expenses expenditure expenditure increase increase of expenses claimed claimed of claimed in in in AY in P&L A/c A.Y. 2013- AY 2012-13 expenses 2013-14 14 in A.Y. over the 2013-14 A.Y. and the 2012-13 A.Y. 2012- 13 1. Other Deepawali 1207790 841170 366620 43.58% Non business/ expenses Expenses Personal nature 2. Other Marketing 2203579 0 2203679 100% Not explained
4 ITA 3736/Mum/2017 expenses Management Specialisation Expenses 3. Other Travelling 9458115 5561367 3896748 70 Unreasonable expenses expenses & Unexplained 4. Other Business 14099542 10352216 3747326 36 Unreasonable expenses promotion & Unexplained 5. Other Business 1794733 772059 1022674 132 Non business / expenses promotion Unexplained 6. Other Muhurt 4619046 3488825 1130221 32 Non business / expenses Expenses Unexplained 7. Other Shivratri 1064982 129125 935857 724 Non business / expenses Sangeet personal Mahotsav expenses Expenses
The Returned total income of the assessee for the AY in reference was only Rs. 1,62,33,960/- , therefore the above claimed expenses are on a very percentage of the Returned income. When these expenses are not of compulsive nature and also need not be mandatorily have to be incurred then in such circumstances , in absence of any evidence being produced by the assessee , the genuineness of these expenses and also their business utility cannot be established. The perusal of the above table and the items of the expenses mentioned show that: (1) It is noticed that the total expenditure of Deepawali expenses, Donations, General charges, Marketing Management specialization expenses, Travelling expenses, Business promotion (Gift), Business promotion (others), Muhurr.t penses & Sbivratri sangeet mahotsav expenses, during the A. Y. 2012-13 was/Rs. 34,47,887/Zi__^ The expenditure on these item Deepawali expenses" Donations, General charges, Marketing Management specialization expenses, Travelling expenses, Business promotion (Gift), Business promotion (others), Muhurat exepenses & Shlvratri sangeet mahotsav expenses has increased to Rs. 21,14,47,62/- i. e. there is an absolute increase reported of amount of Rs. 13,30,31,25/-.The expenditure has increase by a percentage of 62 % of the last year. Such type of high i. e. 62% increases in these expenses is beyond normal course & not explained & is not understandable. Further, despite having been asked the assessee has not furnished any evidence to prove the correctness. reasonableness, of increase & neither the genuineness of these expenses have been proved, despite the fact that proving the genuineness of these:"expenses, would have been in the interest of the assessee itself. But still the assessee has chosen not to place evidence in support of claiming these expenses. Even producing the bill & voucher of expenditure in support of such increased expenses could not have helped until the assessee did not come forward to explain & justify the increase in the expenses as genuineness ;''having been increased exclusively for the purpose of business. In absence of any satisfactory explanation, justification and for non-producing evidence to prove that these expenses were incurred exclusively for the purpose of the business, the genuineness of these expenses is thus not established. Since assessee has brought no satisfactory & supportable evidence & reason to justify such vertical increase in the expenses & expenditure on the new items of expenditure. Therefore such unusual increase in taken to be unexplained & the expenses cannot be taken as genuineness & having been incurred exclusively for the purpose of business. The claim of such expenses cannot be accepted for these reasons the above expenses are disallowed and added to the total income of the assessee. (The disallowance of these expenses is comes at Rs 1,19,72,812/-)”
5 ITA 3736/Mum/2017
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions on the issue which has been reproduced at para 7.1 on pages 14 to 22 of order of Ld.CIT(A). The sum and substance of arguments of the assessee before the Ld.CIT(A) are that the reasons for increase in expenses is commensurate with increase in turnover of the assessee for the year under consideration, for which necessary details has been filed. The assessee further contended that its turnover has been increased to Rs.387.97 crores from 184.02 crores and due to this, corresponding expenses under various heads have been proportionately increased which is neither excessive nor unreasonable. The AO, without recording any reason as to how expenditure incurred under various heads is not allowable, simply disclosed on the basis of increase in expenditure without considering corresponding increase in total business for the year. The Ld.CIT(A), after considering relevant submissions of the assessee and also taking note of observations made by the AO during assessment proceedings sustained addition made by the AO towards expenditure to 10% and deleted the balance amount on the ground that the AO has not brought out any concrete material to make such huge disallowances. The relevant observations of the Ld.CIT(A) are as under:-
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“7.3. I have considered the facts of the case, assessment order passed by the AO and the submission of the appellant. This ground of appeal is against the disallowance of Rs.111972812/- out of expenses stating steep increase in the expenses. I have perused facts at the case and details and submissions filed by the appellant before the AO and puling the appellate proceedings, I find that at the first plea the appellant has developed wholesale business which was only 784.02 crores in the year 2011-12 has jumped to 387.94 crores in the year under consideration. The expenses on Diwali, travelling, business promotion, muhurat shivratri, sangeet mahotsav etc. are regular from year to year, there is increase in expenses in comparison to earlier years due to various reasons e.g. increase in value of items increase in value of work, parties customers etc. Looking at the nature of expenses and the observation of the AO, it will be difficult to sustain the entire .estimated disallowance because the AO has not brought any concrete material to make any such huge disallowance. Therefore, keeping in view of the nature of expenses and the facts and circumstances of the case it will be reasonable to restrict the disallowance to Rs.11,97,281/- and therefore the AO is directed to delete the balance disallowance of Rs. 1,07,75,531.”
4. Aggrieved by the order of Ld.CIT(A), revenue is in appeal before us.
The Ld.DR submitted that the Ld.CIT(A) was erred in scaled down disallowance of expenses to Ras.11,97,281 as against total disallowance made by the AO for Rs.1,19,72,812 without appreciating the fact that the assessee neither justified increase in expenditure nor filed any details to show that the expenditure is commensurate with its business for the year under consideration. The Ld.CIT(A), without assigning any reasons, made adhoc disallowance of expenses without appreciating the fact that there is a fall in gross profit of the assessee in spite of increase in turnover for which no explanation has been offered by the assessee.
7 ITA 3736/Mum/2017
The Ld.AR for the assessee, on the other hand, submitted that the assessee has filed complete details of expenses before the AO and also explained how expenditure incurred under various heads is commensurate with its business turnover for the year under consideration. The AO made disallowances without recording any observation as to incorrectness in books of account or supporting evidence filed by the assessee. Therefore, the Ld.CIT(A) after considering relevant facts, has rightly scaled down disallowance of expenses and his order should be upheld.
We have heard both the parties, perused materials available on record and gone through the orders of authorities below. It is an admitted fact that there is a substantial increase in certain expenditure incurred under the head ‘Deepawali expenses, donation, general expenses and other expenses. It is also an admitted fact that the turnover of the assessee has been increased from 184 crores to Rs.387 crores. The AO has disallowed expenditure incurred under various heads without recording any observation as to incorrectness in books of account maintained by the assessee for the relevant financial year or supporting evidence filed in justifying expenditure incurred under those heads.
The AO has compared increase in expenditure to previous financial year without taking note of corresponding increase in business turnover of the assessee. On the other hand, the assessee has filed necessary details of 8 ITA 3736/Mum/2017 expenditure and also explained reasons for increase in expenditure. The Ld.CIT(A), after considering relevant facts and also taking note of the fact that there is no observations by the AO in regard to the incorrectness of books of account scaled down disallowance to 10% for such expenses. We do not find any reason to interfere with the findings recorded by the Ld.CIT(A) while deleting addition made by the AO towards disallowance of expenditure.
Hence, we are inclined to uphold the findings of Ld.CIT(A) and dismiss the appeal filed by the revenue.
In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open court on 15-05-2019.